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TMI Blog2023 (4) TMI 843X X X X Extracts X X X X X X X X Extracts X X X X ..... Risk adjustment - TPO did not give working capital adjustment for the reason that the assessee has demonstrated that there is a difference in the level of working capital employed by the assessee vis- -vis the comparables - HELD THAT:- Working capital adjustment should be allowed and direct the AO/TPO to examine the issue afresh after affording the Assessee opportunity of being heard. Interest on outstanding receivables - TPO considered the interest on receivable as a separate international transaction and accordingly which is upheld by the DRP - HELD THAT:- As relying on Tivo-Tech Pvt. Ltd. [ 2023 (2) TMI 837 - ITAT BANGALORE] we hold that the interest on delayed receivable be calculated at LIBOR + 2%. It is ordered accordingly. - IT(TP)A No.873/Bang/2022 - - - Dated:- 9-1-2023 - SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER For the Appellant : Shri Sandeep Huligol, Advocate For the Respondent : Shri K .Sankar Ganesh, Jt.CIT(DR)(ITAT), Bengaluru. ORDER Per Padmavathy S., Accountant Member This appeal is against the final order of assessment passed by the ACIT, Circle 7(1)(1), Bangalore u/s. 143(3) r.w.s. 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mark-up (OP / OC) 14.89% 6. The assessee chose the following comparables, where the 35th percentile of average margin is at 5.93% and 65th percentile is at 21.18%. Accordingly, the assessee concluded that the price charged by the assessee is within arm s length: S.No. Company Name Average OP/TC (%) 1. Rheal Software Ltd -4.25% 2. Yudiz Solutions Pvt Ltd 2.88% 3. Isummation Technologies Pvt Ltd 3.44% 4. Maveric Systems Ltd 5.24% 5. SagarSoft (India) Ltd 5.93% 6. Sasken Technologies Ltd-Software Services 6.52% 7. CG-VAK Software Exports Ltd 9.29% 8. E-Zest Solutions Ltd 10.20% 9. R Systems International Ltd-Information technology services an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Pvt. Ltd. 55.78 19 E-Infochips Pvt. Ltd. 56.95 20 Cybage Software Pvt. Ltd. 57.62 21 Consilient Technologies P. Ltd. 59.44 22 Ginni Systems Ltd. 66.51 35th Percentile 16.46% Median 24.00% 65th Percentile 36.30% 8. Accordingly, the TPO computed the TP adjustment as below:- Appellant's PLI (OP / OC) 14.89% 35th Percentile 16.46% Adjustment required Yes Median Margin of comparable set (`M') 24.00% Operating Cost of the Appellant Rs. 452,50,95,852/- Arm's Length Price (1 + M) * Operating Cost Rs.561,11,18,856/- Price Received , Rs. 519,90,29,652/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... much comparable to the assessee on functional aspect. With regard to brand value the DRP held that the spend is only 0.58% and there is no indication that the brand value has any impact on the profitability of the company. 14. The ld. AR reiterated the submissions made before the lower authorities. The ld. AR drew our attention to the detailed submissions made before the DRP as given in page 787 to 795 of PB in this regard. The ld. AR also submitted that the DRP in assessee s own case for AY 2017-18, has excluded Wipro as comparable on the ground that the company is not functionally comparable to assessee. The ld. DR relied on the order of the lower authorities. 15. We heard the rival submission and perused the material on record. We notice that Wipro is having diversified business operations such as digital strategy advisory, global infrastructure services, application services, product engineering, analytical services, research development, hardware software design, etc. which is clear from the extract of annual report as given in page 787 of PB Vol. III. It is also noticed that the company has spent INR 3041 million during FY 2017-18 on R D activities. It is also noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons and therefore cannot be compared with the assessee. In this regard, the ld. AR drew our attention to the submissions made before the DRP in page 775 to 780 of PB Vol. III. 19. The ld. DR relied on the decision of the lower authorities. 20. We heard the rival submission and perused the material on record. We notice that Infosys Ltd. is having diversified business operations such as consulting, technology, engineering and outsourcing services etc. which is clear from the extract of annual report as given in page 775 of PB Vol. III. It is also noticed that the company has spent INR 3740 million during FY 2017-18 on R D activities. It is also noticed that the DRP in assessee s own case for AY 2017-18 (PAGE 983 of caselaw compilation) has excluded Infosys on the ground that the FAR of the company is distinct and different from that of the assessee company. The FAR analysis in the light of the DRP s decision to exclude Infosys in assessee s own case has not been considered by the TPO and the contention of the assessee that there is no segmental information available inspite of the diversified operations needs to be examined factually. Therefore we remit the issue back to the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces based on regulatory changes, client needs and market inputs. This involves prioritizing new features and services to be developed. The function pertaining to the conceptualization and design of the software application is an important function performed by the AEs. Wipro India is not involved in this critical step of the value chain. Software specification The AEs determine the exact scope of work to be performed by Wipro India and also provide the software module specifications, instructions of various tasks to be performed along with project content, delivery time, etc. for developing the particular software as a package. On a need basis, Wipro India provides its inputs in the requirement analysis phase of the software development process. Architectural/ high-level designing The AEs are responsible to create core architectures/ high level technical designs which provides a roadmap for the development. Development/ Coding Wipro India undertakes the preparation of detailed design based on the core architecture and then undertakes the coding function with respect to the software modules to be developed. These services only act as a suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia utilises its facilities, office premises, communication facilities, etc. for the purpose of its business. All assets of Wipro India such as equipment/ machinery, software tools etc. are either directly or indirectly used for the purpose of carrying out its business activity. During FY 2017-18, Wipro India employed tangible assets such as furniture, fixtures, office equipment, and computer equipments. 5.4.2. Intangibles Wipro India does not own any non-routine intangible asset with respect to the services rendered by it to the related parties. Alight Solutions owns the key intangible assets utilized within the Alight group, including, but not limited to, proprietary technologies, processes, databases and trademarks. 5.5. Risks assumed The risk profile of Wipro India vis- -vis its AEs is provided in the table below: Table 4: Risk Profile Risk Category and Description Wipro India AEs Market Risk: Market risk arises for a business due to increased competition and relative pricing pressures, change in demand patterns and needs of customers, inability to devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isk. AEs have business dealings with number of vendors customers and deal in currency(s) which are different from their respective functional currency. Therefore, AEs are exposed to foreign exchange risks. Capacity Utilisation Risk: This risk arises on account of under-utilisation of manufacturing /service facility/personnel. Wipro India is compensated on a full cost plus mark-up basis and hence is assured of the recovery of costs of any underutilized / unutilized resources. Wipro India is not exposed to this risk. AEs bear this risk as they compensate Wipro India on all costs incurred by them. 26. We also notice that the functional profile of Tally as given in the annual report is extracted as below:- Corporate information Tally Solutions Private Limited ('the Company' or 'TOL') and its subsidiaries and associates are hereinafter collectively referred to as 'the Gray'. The Company and its subsidiaries are mainly engaged in the business of development and sale of accounting and business management software and incidental services. The associates of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnology outsourcing and consulting income (page 192 of paper book Vol I). Therefore, it is clear that the assessee is not into software product sales whereas on perusal of the annual report of Tally, it is noticed that the company is having significant income from the sale of products. It is further noticed that Tally is having in-house Research Development centre as per the annual report as extracted in page 787 of PB Vol.III. From the above discussion, it is clear that Tally is functionally dissimilar to the assessee and given the fact that the company is into sale of software products and services, the assets employed and the risk profile would also be dissimilar to the assessee. Therefore, in our considered view, Tally is not comparable to the assessee and it is directed that the company be excluded from the list of comparables. Eclrex Services Ltd. 28. The assessee submitted that the company is mainly engaged in ITeS services i.e., KPO BPO services such as data management and analytics solutions, therefore the company is not comparable. The TPO rejected the contentions and held that the company is a comparable since it provides software support services. On furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that Cybage is also engaged in provision of ITeS and BPO services and there is no segmental information available in the financials of the company. It is therefore erroneous on the part of the TPO to compare the assessee which is low risk captive software development service provider with that of a company which is involved in diversified activities where no segmental information is available. In this regard, the ld AR relied on the following decisions:- a) Steria India Ltd. v. DCIT [2018] 92 taxmann.com 120 (Del) b) Telcordia Technologies India P. Ltd. v. ACIT, ITA No.7821/Mum/2021 34. We heard the rival submission and perused the material on record. We notice that the main contention of the assessee with regard to exclusion of the company is that the company is functionally dissimilar having diversified activities including ITeS and BPO services. On perusal of records, it is noticed that the segmental information is not available though it is mentioned as per the website of the company that it is involved in various other activities including order management, research analysis, social media management and monitoring, etc. (page 761 762 of paper book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITeS segment, the TPO while passing the order giving effect to the directions of the DRP, had made the TP adjustment in the ITeS segment in spite of the fact that the profit margin of the assessee is within the 35th percentile and 65th percentile of the average margin of the final list of comparables of ITeS segment. The ld. AR further submitted that the assessee has filed a rectification petition dated 22.8.2022 u/s. 154 before the AO/TPO and is awaiting the order. The ld. AR therefore prayed for a direction in this regard whereby there will not be any TP adjustments. Accordingly it is submitted that rest of the issues contended towards the TP adjustment in ITeS segment will become academic. 39. The ld. DR did not have any objection to the submissions of the ld. AR. 40. We heard the parties and perused the material on record. We notice that in the order giving effect (pg.961 to 968 of PB Vol.III) to the DRP directions, the TPO had considered 14 comparables, the 35th percentile of the average margin of which is 10.43% and the 65th percentile is 19.54%. We also notice that the operating margin of the assessee as has been considered by the TPO (page 967 of PB Vol.III) works out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demonstrated with any data or information as to the impact of working capital on the costs, price or profit. (ii) working capital requirements and impact depends on various factors such as business cycle, the nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc., all of which cannot be captured in the year end receivable or payable position. (iii) the year end receivables and payable may not reflect as to whether it arises from transactions relating to revenue account or capital account as there is no uniformity in the accounting or reporting requirements and an intermixing is generally possible. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 21. The learned counsel for the assessee submitted that the conclusions of the DRP are identical to the conclusions arrived at by the revenue authorities in the case of Huawei Technologies India Pvt. Ltd. v. JCIT [2019] 101 taxmann.com 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers. 22. The tribunal observed that examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the decision of the tribunal referred to above, after affording the Assessee opportunity of being heard. 47. During the course of hearing, the ld. AR did not press for ground No.6.2 with regard to risk adjustment and accordingly the same is dismissed as not pressed. Interest on outstanding receivables Ground 7(7.1 to 7.3) 48. Ground No.7 is as under:- 7. Ground No. 7: Interest on outstanding receivables 7.1. That the Ld. AO/Ld. TPO erred in undertaking adjustment for interest on delayed receivables by ignoring the fact that outstanding receivables and notional interest on the same cannot be considered as separate international transactions. Further, the Ld. AO/ TPO erred in 14ot acknowledging the fact the Appellant is a debt free entity and accordingly no adjustment on receivables is warranted. 7.2. The Ld. AO/Ld. TPO has erred in not considering that, such differences should be adjusted through the appropriate mechanism of working capital adjustment and not looked at separately, being closely aligned to the primary international transactions of rendering of services to AEs. Thus, the outstanding receivables would not constitute an international tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. Further Ld.AR submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus receivables arising out of such transaction have already been accounted for. Alternatively, he submitted that working capital subsumes sundry creditors and therefore separate addition is not called for. 23.1. Ld.TPO computed interest on outstanding receivables under weighted average method using LIBOR + 300 basis points applicable for year under consideration that worked out to 3.3758% on receivables that exceeded 30 days. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction. 23.2. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT v. Kusum Health Care (P.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non-payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case noted a decision of the Hon'ble Bombay High Court in the case of CIT v. Patni Computer Systems Ltd. [2013] 33 taxmann.com 3/215 Taxman 108 (Bom.), which dealt with question of law: (c) 'Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd v. DCIT [2017] 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterised a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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